Extreme Makeover at Morgan Stanley

Extreme Makeover at Morgan Stanley

Morgan Stanley, one of the grandest names on Wall Street, transformed itself into an old-fashioned bank holding company in a desperate bid to survive the financial crisis.

By LOUISE STORY

Two months ago, Morgan Stanley, one of the grandest names on Wall Street, transformed itself into an old-fashioned bank holding company in a desperate bid to survive the financial crisis.

But now this new Morgan Stanley faces an even bigger challenge: figuring out where to go from here. Goldman Sachs, its perennial rival, is in the midst of a similar metamorphosis, and both firms face a somewhat uncertain future.

Drawing up the roadmap at Morgan Stanley are Walid A. Chammah and James P. Gorman, who are not only co-presidents but also potential rivals to succeed John J. Mack as chief executive.

Mr. Chammah is trying to re-engineer Morgan Stanley’s vaunted investment banking operation for leaner times, which means cutting jobs — lots of them. Since July the firm has announced plans to eliminate 16 percent of its work force.

Mr. Gorman, meantime, is urgently hunting for a bank to buy to build a base of customer deposits that would provide a crucial cushion — and new types of earnings. So far, he has not sealed any deals.

Morgan Stanley has had some good news in the last few days. Its share price rose three days in a row, along with other financial stocks, and Fitch Ratings upgraded its outlook for the bank’s credit rating to stable from negative. The company plans to sell more than $2 billion in new debt that will be backed by a federal program.

Still, neither the co-presidents nor Mr. Mack, 64, have fully persuaded investors that Morgan Stanley can recapture its past glory — or past profits. Morgan’s stock is worth only a fraction of what it was a year ago and the company’s next quarterly results, due in mid-December, do not look promising.more

Fannie Mae names Johnson chief financial officer

Fannie Mae names Johnson chief financial officer

Fannie Mae names former Hartford Financial Chief Financial Officer David Johnson as CFO

NEW YORK (Associated Press) - Fannie Mae said Tuesday it named David Johnson to serve as the mortgage giant's chief financial officer and executive vice president, beginning immediately.

Johnson joins the company from Hartford Financial Services Group, where he served as chief financial officer and executive vice president.

His predecessor at Fannie Mae, Stephen Swad, left the company in August and was temporarily replaced by David C. Hisey, formerly Fannie's senior vice president and controller.

Hisey will stay on in his role as executive vice president and deputy chief financial officer. Hisey joined Fannie Mae in January 2005 as senior vice president and controller.

Incoming CFO Johnson has previously held the post at Cendant Corp. and also worked in the investment banking unit at Merrill Lynch. more

AIG chief slashes salary to $1

AIG chief slashes salary to $1

Top executives agreed to a series of pay restrictions, including canceling bonuses, as the troubled insurer struggles to stay afloat.

By Kenneth Musante, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- AIG Chief Executive Edward Liddy agreed to slash his annual salary to $1 as part of a series of voluntary pay restrictions by top executives tied to a massive $150 billion government bailout.

AIG (AIG, Fortune 500) will also forgo bonuses this year and eliminate pay increases through 2009 for the firm's top executives.

Liddy will get paid $1 per year for 2008 and 2009, with his compensation consisting entirely of equity payments. While he will not receive bonuses during those years, he will be eligible in 2010 for "extraordinary performance." He will also be ineligible for severance payments.

"This action by the senior management team demonstrates not only that we understand our obligation to taxpayers and shareholders, but also that we are committed to the future success of this organization," said Liddy in a statement.

In addition to Liddy, Paula Reynolds, whom AIG hired as chief restructuring officer in October, will receive no salary or bonuses in 2008. From 2009 onward, any compensation above her base pay will be tied to the progress of AIG's restructuring.

"It is only fair that top executives, who benefit the most when firms do well, should also bear the burden of the difficult economic consequences their firms now face," said New York state Attorney General Andrew Cuomo in response to a letter from Liddy informing him of the pay cuts.

Cuomo had voiced concern about AIG's expenditures in October after it was reported that the company had spent $440,000 on a weekend meeting at a resort. Subsequently, AIG immediately cancelled 160 events, worth an estimated $8 million.

Government help: AIG has been in full-blown cost-cutting mode since October, as it has been receiving billions in government loans. more

Why the banks need stronger medicine

Why the banks need stronger medicine

NEW YORK (Fortune) -- The latest round of government help for Citi buys the troubled bank some time. But the financial sector will need much stronger medicine before a recovery can get under way.

The feds agreed Sunday night to guarantee $306 billion worth of troubled assets for the troubled New York bank. The Treasury also poured $20 billion into Citi via a purchase of preferred stock, adding to the $25 billion stake the government took in October via the Troubled Asset Recovery Program.

The capital infusion and asset guarantees reduce the threat of a sudden collapse at Citi (C, Fortune 500), the biggest U.S. bank by assets with more than $2 trillion on its balance sheet. The moves also help the rest of the banks by showing that the government won't permit another disorderly failure along the lines of September's collapse of broker-dealer Lehman Brothers, which set off a flight from risky assets that continues to this day.

Still, the fact that Citi needed a new lifebuoy from the government less than a month after getting an infusion via the TARP capital purchase program shows how the entire financial system is laboring under an unmanageable debt load. The problem, analysts say, calls out for much larger infusions of taxpayer funds, in the name of stabilizing the financial system - as well as restructurings that give officials time to completely fix problems at troubled institutions.

"'Over-levered' is the purest description of the U.S. financial system today," Friedman Billings Ramsey analyst Paul Miller wrote in a report last week. "At eight of the largest financial institutions, tangible equity equals 3.4% of assets, which implies 29x leverage. If this wasn't bad enough, we expect that current tangible common equity will be essentially wiped out by losses from existing loan and security books."

Indeed, with house prices falling after a decade-long run-up and unemployment last month hitting a 14-year high, U.S. banks face increasing loan losses on mortgages, commercial real estate and credit cards. FBR's Miller writes that the eight biggest U.S. firms - Citi, Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500), Morgan Stanley (MS, Fortune 500), Wells Fargo (WFC, Fortune 500), AIG (AIG, Fortune 500) and General Electric's (GE, Fortune 500) financial services arm - need at least $1 trillion in new capital to weather the coming recession without the prospect of an institutional failure.

He says the most likely scenario is that these eight giants will face losses of around $400 billion over the life of their existing loan portfolios - but cautions that those losses could reach almost $600 billion.

"If our models are too conservative with respect to losses," he writes, "more capital will be needed going forward."

Investors have become accustomed to banks' voracious need for capital at a time of global deleveraging. Firms around the globe have raised hundreds of billions of dollars in new capital over the past year. But the deepening problems at one of the biggest capital-raisers - Citi, which has brought in $50 billion from private investors in addition to the funds it has gotten from the government - suggest that merely raising more money isn't going to be enough to see many firms through the worst of the downturn.

"We estimate C's risky assets to be roughly $120 billion," Oppenheimer analyst Meredith Whitney writes Monday, "but the company has almost $600 billion in consumer and card loans. We are unclear exactly which assets were targeted in the $306 billion."

Even with more capital in hand, the banks' problems aren't just going to go away. Indeed, the KBW Bank stock index was down 37% this month heading into Monday, in a vicious selloff that started after Treasury Secretary Henry Paulson distributed the first round of TARP checks to the biggest banking companies.

One reason is that the piecemeal approach to government support - $25 billion here, $20 billion there - isn't going to persuade investors to pour new money into an institution such as Citi with a balance sheet measuring in the trillions, says Mark Sunshine, president of middle market lender First Capital. He says that for truly troubled institutions such as Citi, with risky assets running into the tens of billions of dollars in a souring economy, the only answer is full government nationalization.

Once the government takes a bank over and wipes out its shareholders, he says, officials can wrap bad assets into a so-called bad bank to be run off over a period of years, then repackage the good bank and sell it off to private investors. He rejects halfway measures such as loan guarantee programs and partial nationalizations such as the feds tried with AIG, Fannie Mae and Freddie Mac. more

Pacific Rim Leaders Vow Further ‘Extraordinary’ Steps on Crisis

Pacific Rim Leaders Vow Further ‘Extraordinary’ Steps on Crisis

Financial News

Nov. 23 (Bloomberg) -- Leaders of Pacific Rim nations promised to work together on further “extraordinary” steps to combat the global economic crisis and pledged to refrain from erecting new barriers to trade and investment.

Leaders of the 21-nation Asia-Pacific Economic Cooperation group, which includes the U.S., China and Japan and accounts for half of world output, also called for improved corporate governance and backed efforts to thaw frozen credit markets.

“We have already taken urgent and extraordinary steps to stabilize our financial sectors and strengthen economic growth and promote investment and consumption,” the group said in a statement during its meeting in Lima, Peru. “We will continue to take such steps, and work closely, in a coordinated and comprehensive manner, to implement future actions.”

The meeting comes amid signs the global economic downturn is deepening as companies from Toyota Motor Corp. to Palm Inc. fire workers to reduce costs. APEC leaders warned that any attempt to shield home markets from overseas competition would only prolong the slump.

“There is a risk that slower world growth could lead to calls for protectionist measures which would only exacerbate the current economic situation,” they said. “Free market principles, and open trade and investment regimes, will continue to drive global growth, employment and poverty reduction.”

Statements of individual leaders, including Mexican President Felipe Calderon, reflected unease over the political transition in the U.S., where President-elect Barack Obama has expressed reservations about free-trade agreements.

Calderon warned Obama against trying to renegotiate the North American Free Trade Agreement, saying restricting commerce would only encourage illegal Mexican emigration to the U.S.

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